The Pears Report: Far from the madding policy

Are we finally moving from energy policy madness to policy making? Alan Pears explores the glimmers of hope.

THE THREAT of electricity blackouts in southern Australia next summer and our bizarre ‘gas crisis’ seem to be dragging us out of the rock-throwing approach to energy policy making.

Stabilising the situation in southern Australia
While initially the debate over South Australia’s problems was about supply, the need to stabilise the situation before next summer has driven some useful developments on both the demand and supply sides.

A call for bids to provide battery storage resulted in 31 bids. Rooftop solar is booming, and large-scale solar and wind are going gangbusters.
This highlights how fast our 21st century energy industry can respond. It also shows how risky those big projects that take years to implement are. Even PM Turnbull’s ideas for Snowy and Tasmanian hydro will struggle to compete in the new world of modular, distributed energy solutions.

We have also seen a belated recognition that demand response can fix short-term problems. Demand response involves aggregators contracting businesses to cut demand or run backup generators at short notice—when paid a fair price for their contribution. This provides guaranteed reduction in electricity (or gas) demand, reducing the need for additional supply capacity.

It is widely used in other parts of the world, but our energy policy makers have been glacially slow in establishing a framework. States will need to set up demand response mechanisms through energy retailers, which they still regulate, as national regulators are very unlikely to act quickly enough.

Since first writing this, AEMO and ARENA have announced a demand response pilot project (www.bit.ly/AEMO-RI) of 100 megawatts. This is great, as someone is finally responding to the obvious: demand response is the quickest, cheapest way of avoiding blackouts. But the way this is being done has also exposed how broken our national energy market system is: they have had to work around the normal mechanisms. We need much more demand response capacity to break the market power of the gas and coal generators, so there is still a need for states to use their powers over energy retailers to drive demand response.

Energy efficiency programs could also help. When SA suffered blackouts because of a 90 megawatt (MW) shortfall, demand was around 3000 MW. At that time, household cooling was probably over 1000 MW: an ongoing building and air conditioner energy efficiency program could have avoided the problem, as shown in the graph on the next page.

The gas crisis
A sudden increase in wholesale gas prices and the difficulties many industries have had even negotiating new gas contracts have uncovered chronic failure in gas policy. It has also exposed the reality that many former energy ministers and politicians work for the gas (and oil and coal) industry.

For decades, Australian governments have proudly described our low energy prices as a competitive advantage—which has led local industry to complacently maintain appallingly inefficient use of energy. But governments have quietly supported an ‘open’ economy, including world parity pricing for oil and gas. These two positions have never been reconciled. The recent gas crisis has exposed a lot of skeletons.

The suddenness of the shift in east coast gas prices has shocked almost everyone. Yet a 2014 study by Deloitte Access Economics1 predicted a multi-billion dollar shift in annual income to the gas industry from other industries, and over 10,000 job losses.

The gas problem has spilled over to electricity, as high-priced gas generation has replaced lower-priced alternatives, due to factors including Abbott’s war on renewables (see The Pears Report in ReNew 139) and closures of old coal generators.

Logical policy would have assisted or required gas users to improve efficiency as markets were gradually exposed to global prices. But we have inadequately regulated, poorly designed markets.

I wasn’t surprised when the government intervened. A situation where Australians are paying more for gas than countries we export gas to clearly does not pass the PM’s ‘pub test’.

Energy efficiency and productivity—glimmers of hope
Most of Australia’s energy efficiency policies focus on providing consumer information and setting fairly weak standards for new equipment and buildings. Policies providing information on building performance at time of resale or lease are emerging. For existing buildings and equipment, limited information and energy auditing programs dominate. The ACT, NSW, Victoria and South Australia offer financial incentives for some activities under their energy retailer obligation schemes.

While these programs have delivered useful savings, they fall well short of an optimum outcome for society. Many of the benefits they deliver are not even measured or costed, and levels of ambition are low.

To put this in context, Australia is supposedly trying to implement climate policies at least cost. Our energy efficiency policies deliver tens of millions of tonnes of emission reductions at costs of minus $20 to minus $200 per tonne of avoided emissions. Put another way, they often offer benefit to cost ratios of around 8 to 1—saving Australians $8 for each dollar invested. Yet the Emission Reduction Fund pays around $12 per tonne of emissions avoided.

Yes, we have our National Energy Productivity Plan (with funding of $18 million), the $200 million NSW five-year plan and many others. But we spend tens of billions of dollars each year wasting energy. And if we included the cost of carbon emissions, that waste would increase by more billions. We have the balance very wrong.

One problem in mobilising improved energy efficiency and productivity is that decision-makers rarely invest in energy saving measures costing more than two or three times their annual savings—a two or three year payback. This is equivalent to delivering 30% to 50% annual interest. We don’t expect that from any other investment, including renewable energy.

There are lots of reasons for this that I’m not going into here. What interests me is that the potential to change this financially disastrous situation is beginning to take shape.

Residential peak electricity demand for South Australia, 2015. This shows the activities contributing to household electricity demand at the times of summer and winter peaks, compared with their average contributions when annual consumption is divided by the number of hours in a year. Over the whole year, heating and cooling is a relatively small proportion of average electricity demand, but it is a large proportion of the (much higher) summer and winter peak demand. Source: EnergyConsult.

Beyond energy audits
It is difficult to pinpoint the actual causes of energy waste in many appliances, buildings and industrial processes. Traditional auditing and sub-metering approaches don’t pick up many less obvious problems. Even when a problem is identified, someone has to do something about it. This costs money and time, and diverts focus from core activities. It involves risks, such as working with a contractor you haven’t used before or changing a process central to delivering your business income or your health or safety. And you have to find the money upfront.

Sophisticated analytical techniques are emerging that reduce or avoid the need for physical energy audits and sub-metering. Dynamic real-time benchmarking against models that predict ‘ideal’ performance can identify emerging problems and alert operators. Machine learning can identify the energy-consuming characteristics of each item of equipment to work out where energy is wasted as well as how much (see for example this CSIRO project: www.bit.ly/2kVbJS3).

These systems can calculate the cost of energy waste. They can also offer businesses and households tangible benefits that are often worth far more than the value of the energy saved, such as avoiding failure of a production line. Avoiding loss of a fridge full of food or avoiding the need to quickly replace a failed hot water service can avert a family crisis: what’s that worth?

New financing models
Another changing dimension is the emergence of new financing options to remove upfront cost barriers, not just for energy efficiency investments but for renewables, storage and other options. Financing can be packaged with ongoing monitoring and management systems and other services.

More households and businesses are placing value on insuring themselves against price rises and reliability issues of conventional energy systems, while the costs of alternatives are falling and their user-friendliness is improving.

Innovation
Innovation across many fields is transforming energy and resource requirements and fundamental business design for delivery of many products and services, and converting demand for products (and infrastructure) into services. Online shopping, health care and many other services create remarkable changes. Distributed manufacturing, 3D printing, computerised design, prefabricated building and many other changes are transforming production. Many also fit well with development of ‘closed loop’ resource use.

My awareness of these remarkable changes was raised recently by my involvement in writing a report for the Australian Alliance for Energy Productivity.2 This report scans emerging innovations that may have a big impact on energy productivity and efficiency. It is amazing how much is happening, even in Australia. There may yet be hope for Australia to become a low-carbon, successful 21st century economy! S

Alan Pears, AM, is one of Australia’s best-regarded sustainability experts. He is a Senior Industry Fellow at RMIT University, advises a number of industry and community organisations and works as a consultant. He writes a column in each issue of ReNew: you can buy an e-book of Alan’s columns from 1997 to 2016, complete with analysis of a range of energy policy themes, at shop.ata.org.au.